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September 28, 2012

Think Small for Retirement Success

Give clients small goals to get them to change their financial habits

In today’s tough economic environment, employers are increasingly concerned with their employees’ financial well-being and are keen to help them become better financial planners. But any efforts companies make to get people more committed to proper financial planning, both in the present as well as for the future, can go to waste if they’re not doing it in the right way, said Liz Davidson, founder and CEO of financial education firm Financial Finesse.

That means encouraging employees to think small and set their financial planning bar lower by following small, incremental steps.

“It sounds so simple, but you have to start with the participant and what’s best for them,” said Davidson. “You’ve got to get people to care [about financial planning], but rather than hitting them with jargon and big-picture stuff that can be overwhelming, it’s best to give them a number of very easy and limited steps to follow.”

Because human beings are wired into the idea of routine, winning something on a small scale is usually the greatest motivator to try and win again. It may seem obvious, Davidson said, but for the longest time, many employers just couldn’t get a handle on this, and as such, “have been frustrated by human nature.”

Now, though, there’s been a sea change in the way employers are approaching their employees financial well-being, and many companies, Davidson said, have understood that they have to understand human nature and “work with it.”

Over the past year, Financial Finesse has seen a significant rise in the number of companies wanting to institute holistic financial wellness programs for their work force.

The trend, Davidson says, stems first and foremost from employers who are anxious to help employees reduce expenses, pay off debts and save more so that they are protected in the event of a double-dip recession, a change in benefits or increases in health care costs, inflation and taxes. But rather than following the traditional approach to financial education, more and more companies now want an end-to-end financial wellness program that centers on helping employees develop and sustain positive financial habits for their working life and beyond, she says.

The crux of such an approach is all based on human behavior – a subject that’s of particular interest to Davidson and one that Financial Finesse has spent years studying. The importance of human behavior is key to the firm’s recently released Best Practices Guide in Financial Wellness, a guidebook that can serve as a template for companies that want to implement a holistic model for employee financial health and well-being.

The guidebook brings together the lessons that Financial Finesse has learned over the last 13 years with the latest research in behavioral finance to create a step-by-step handbook. Employers and financial professionals can use the guidebook to create programs that empower employees to change the way they manage their money and invest for their future.

“The first thing an employer needs to do is to get a commitment from the people they want to educate about financial responsibility, and that needs to be done by breaking things down into the small, easy steps that are easy to understand and achieve,” Davidson (left) said.

Take, for example, a challenge that gets employees to save $1, $3 or $5 a day for 30 days.

“Setting the bar low enough triggers the rewards center that’s so important in human nature,” Davidson said, and anyone who manages to take on the easy challenge will probably be inspired to want to take on something greater, “like saving $10 a day.”

Giving people small things that they can easily accomplish sets them up for greater future success than giving them a long laundry list of big goals that in all likelihood, just sets them up for failure and makes them give up completely, Davidson said.

“Small wins make people want to come back for more and keeps them engaged for the long term,” she said. “There are seven stages of change: Stage One is resistance to change; Stage Seven is ‘I have made the change, and it is now a habit.’ You can take people from one stage to another, but you can’t take a Stage One and hope to make them into a Stage Seven, because people need to feel that this is their idea and not something that you’re forcing them to do.”